Japanese investors moving towards structured products

Japanese investors are moving away from negative rates and heading instead towards more structured products internationally, according to Bank of America Corporation.

Assets such as debt backed by pools of loans are attracting Japanese institutions, the corporation said, citing the example of Norinchukin Bank, which recently snapped up over $2.9 billion of UK mortgage-backed bonds.
Japan Post Holdings Co's company president, Masatsugu Nagato, has confirmed it is to move more of its $2.6 trillion investment portfolio into products including real estate investment trusts based overseas, infrastructure funds and private equity.

The head of international structured finance research at Bank of America Merrill Lynch, Alex Batchvarov, told Bloomberg: "Japanese investors are increasingly looking abroad, which is a natural reaction to negative interest rates. We expect the next step to be moving into commercial real estate, as well as commercial and residential mortgage-backed securities both in the U.S. and Europe."

One of the main reasons that Japanese organisations are looking to move into more structured products is the unexpected monetary stimulus by the Bank of Japan, which is helping to push Japanese investors abroad. However, it is said that these products could be less liquid, meaning that, if the investors seek to exit them quickly, they could be facing losses. However, as Japanese sovereign yields of as long as a decade sitting below zero, many domestic institutions feel they have no choice but to move their assets into other areas.

Diverse structured products arising from the vast US home loan market that is tied up into Government-backed securities are also appealing to Japanese investors. This $5 trillion marketplace offers examples of high-yield corporate debt tied up in securities, however, as new US regulations begin to lower the issuance and liquidity of such securities, the Japanese investors may wish to set their sights elsewhere.

These collateralized loan obligations (CLO) dropped in the US to $8.2 billion in the first quarter of this year, according to Bank of America Merrill Lynch's Batchvarov, which was the lowest level recorded since 2012. This was because managers are now forced to follow new legislation which insists they retain five per cent of deals. While sales of CLOs hit a record high of $124 billion in 2014, Batchvarov confirmed that CLO issuance in the US in 2016 could fall as low as $45 billion.

According to Credit Suisse Group AG, holdings of securitised products such as CLOs led to writedowns of around $115 million over the first quarter of last year, as well as $146 million in the final quarter of 2015.

“This is a not reflection of the credit performance of the bonds, this is a reflection of market volatility and mark-to-market losses, said Batchvarov. "Investors should choose the portfolio and CLO manager carefully and hold to maturity. Just invest and hold on to them," he told Bloomberg.

Since yields on Japanese Government bonds have dropped so significantly due to the central bank's negative interest rate policy which was rolled out in January of this year, Japanese institutions have also been looking towards bonds located overseas. According to Swiss bank, UBS, "US Treasuries, French, Aussie and Canadian bonds were favoured in February. Treasuries make up for most of Japanese investors’ foreign bond purchases.

"February was no different, with net purchases amounting to Y1.8tn ($16 billion), the largest amount since September 2015. French bonds, historically Japan’s preferred euro market, saw net purchases of Y613bn. Elsewhere, Australia (Y182bn; largest since July 2015) and Canada (Y182bn; largest since May 2010) saw notable amounts of net purchases," the bank added.

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